Mark Pestronk
Q: I am reviewing my agency's standard agreement with our independent contractors. I can't seem to reconcile two seemingly contradictory goals: the need to make sure that our ICs are independent enough to avoid having a taxing authority reclassify them as employees on the one hand, and the need to prevent fraud and theft by ICs on the other hand. The more we let the ICs have the freedom to do what they want, the more we risk being victimized by unscrupulous ICs. Is it possible to carve a happy medium in an IC agreement?
A: It is indeed difficult to achieve both goals, and most host agency contracts go overboard in one direction or the other. However, it is possible to strike the necessary balance in a well-drafted IC agreement.
Start with the steps needed to avoid the risk of reclassification. Unfortunately, the diversity of criteria and enforcement policies among hundreds of state and federal government agencies means that there is never a guarantee that your agreement will pass muster no matter where your agency is or where the IC lives, but here are some practices that should not affect your efforts to prevent fraud and theft:
- Require each IC to set up his or her own corporation or limited liability company. In my experience, state auditing agencies will often view the IC's own business as the entity responsible for withholding taxes and unemployment contributions, reducing the likelihood of an audit of the B2B relationship between you and the IC's corporation or LLC.
- Be clear, in the agreement and in practice, that you don't control the manner and means by which the ICs do the work; i.e., when, where and how they sell travel. Don't set the IC's hours or work location; impose sales quotas; require attendance at meetings or training except for one-time orientation on your booking and back-office systems; dictate sales; or forbid the IC from working with other host agencies or businesses. Instead, you can incentivize the IC to work only through you.
- Charge a fee per month, but you can provide that you will waive it when the IC's sales exceed a certain amount. Also consider having a menu of other fees for business services that you can provide, such as desk rental and overnight courier service.
Once you have these true, arms-length IC terms in place, you can impose rules that protect your clients' money, your client base and your supplier relationships, such as these:
- Require that all client payments go directly to suppliers or into your merchant account, never to the IC personally.
- Require that all bookings made on behalf of your host agency be made through your designated booking channels and IATA number and that they be entered into your CRM system and back office promptly so that you can track commissions and catch irregularities.
One last piece of advice: If you have to go too far on one side, err on the side of too many anti-fraud and anti-theft rules rather than too much independence, as IC fraud and theft are unfortunately more common than government audits.